Australia: Australian Emissions Trading Scheme becomes Carbon Pollution Reduction Scheme

Last Updated: 11 September 2008
Article by Elisa de Wit

The Government's eagerly awaited Green Paper on its climate change strategy was released yesterday. Following hot on the heels of Professor Garnaut's draft report, the Green Paper finally provides some clarity on the Government's approach to an Australian emissions trading scheme. The first clarification being a name change: the scheme will be known as the "Carbon Pollution Reduction Scheme" (presumably to be known as the CPRS or CPR Scheme in due course).

The Green Paper confirms that the Government's climate change strategy encompasses not only mitigation (ie reducing Australia's greenhouse gas emissions), but also covers adaptation (ie responding to climate change that cannot be avoided) and contributing to a global solution.

The Government has reaffirmed its intention to start an emissions trading scheme in 2010, which it considers is the key mechanism to achieve substantial emissions reduction "in a responsible and flexible manner and at the lowest possible cost". This Legal Update concentrates on the design elements of the proposed scheme.

Permits

The permits issued under the scheme will be known as 'carbon pollution permits', and it is intended that the majority of permits will be auctioned, rather than given out freely. Ultimately, the Government will move to auctioning all permits.

Permits will be personal property, such that they could not be extinguished without compensation being payable. Each permit would represent 1 tonne of CO2 –e, and they would be date stamped for a particular year. It is not proposed to impose any barriers on who may buy or hold permits, in order to encourage liquidity in the market.

Permits will be able to be banked (ie used in future years). There will also be limited borrowing allowed of permits from the following year, with the limit yet to be determined. It is also proposed that there be an initial cap on the price of permits (up until 2015), which will be set at a level above the estimated market price.

Caps

The significance of the caps for the scheme is that they will determine the price of the permits. The long term target is still stated to be a 60% reduction of 2000 levels by 2050, however it will be necessary to plan for how this target will ultimately be reached (ie will there be a gradual reduction of emissions over the relevant timeframe, or will steep reductions be required at some point within the timeframe).

It is proposed that annual scheme caps would be set for a 5 year period, which would be extended every year by a further year. Gateways would also be set beyond the 5 year period covering a 10 year period. The following figure illustrates how this would work.

Figure 1. 2008-10 guidance over scheme caps and indicative national emissions trajectory

Initially, only indicative trajectories for the period 2010 to 2013 will be given by the Government, with the trajectories for the period 2014 to 2015 being provided in 2010, once the international situation is clearer. It is not intended that the annual caps would be announced until early 2010.

Coverage

As anticipated, the Government proposes that the scheme should cover all 6 greenhouse gases. It will apply to stationary energy, transport, fugitive emissions, industrial processes, and the waste and forestry sectors. This is a slightly different approach to that taken by Professor Garnaut in his draft report, who proposed excluding the waste and forestry sectors, at least initially, from the scheme (see our legal update).

In relation to agriculture, the Government considers it is appropriate to include agriculture if issues such as emissions estimation and reporting can be resolved. However, agriculture would not enter the scheme until 2015, with a final decision being made on inclusion or exclusion by 2013.

The transportation sector would be included by imposing the liability on the upstream fuel suppliers, however in order to ensure that the cost is not felt (at least initially) by households, the Government proposes to cut fuel taxes to offset the price increases likely to result from this liability. This measure would be put in place for an initial 3 year period, with a review undertaken at the end of this period. A similar mechanism will be put in place for heavy vehicle road users for an initial one year period.

It is intended that forestry will be provided with the ability to voluntarily "opt-in" to the scheme. Forest landholders would be given permits to reflect the net quantity of CO2 stored in the forest. However, in accordance with the Kyoto Protocol rules, only those forests established after 1990 would be eligible for such permits.

With the coverage proposed, the estimate is that around 1000 companies will face a liability under the scheme (less than 1% of Australian businesses). This estimate is based on a threshold of 25,000 tonnes of carbon per year being emitted by a company or entity, which matches the facility threshold set out in the National Greenhouse and Energy Reporting (NGER) Scheme which commenced on 1 July 2008 (see our updates from February and June).

Offsets

Given the wide coverage proposed under the scheme, the Government is not proposing that there will be a role for domestic offset credits. The rationale being that offsets can usually only be created in uncovered sectors, and given the extensive coverage proposed, there is limited opportunity for creation of offsets by uncovered sectors. In particular, as agriculture may be covered in the scheme eventually, it is not considered that it makes sense to develop offset methodologies and put in place the necessary administrative arrangements to accredit such offsets for what may be a relatively short period (ie 5 years).

Linkage with other trading schemes

It is intended that covered sectors will be able to purchase offset credits from other schemes to meet their emissions liability, however initially, only certified emissions reductions (CERs) created under the Clean Development Mechanism (CDM), emission reduction units (ERUs) created under the Joint Implementation Mechanism and removal units (RMUs) created in respect of land use, land use change and forestry activities would be accepted. There would also be limits on the amount of these credits that could be surrendered by a covered party.

Selling Australian carbon pollution permits into the international market would not be allowed, at least in the initial years of the scheme.

Compensation and financial assistance to affected sectors

The Government has committed to using every cent raised through the trading scheme to assist households and businesses to adjust to a lower carbon economy. Low income households will be provided with assistance through the existing tax and payment systems. Business will be assisted through the establishment of a Climate Change Action Fund (CCAF), which will provide funding for activities such as innovative new low emissions processes and industrial energy efficiency projects with long payback periods.

In accordance with previous indications, the Government has confirmed that financial assistance will be provided to trade-exposed emissions-intensive industries. The rationale behind this approach is that it avoids "carbon leakage" (ie these industries relocating to other parts of the world where there is no cost imposed on carbon emissions). Free permits will be provided to these industries, based on the emissions intensity per unit of revenue. For example, activities with an emissions intensity over 2,000 tonnes CO2 –e per one million dollars of revenue would receive assistance at a rate of 90% of industry average emissions per unit of output. The allocation of free permits to this sector would be around 30% of the total pool of permits.

A limited amount of assistance would also be provided to existing coal-fired electricity generators, as an industry which is likely to be strongly affected by the introduction of the scheme. To provide this assistance a new mechanism, called the Electricity Sector Adjustment Scheme (ESAS) will be established.

What next?

The Government intends to consult with a variety of stakeholders in relation to the Green Paper, in particular, the design elements of the Carbon Pollution Reduction Scheme. Submissions are due by 10 September 2008. Final decisions on the scheme will be set out in a White Paper, which will be released in December 2008, in conjunction with draft legislation. The White Paper will also provide an indication of the medium-term emission targets.

It is hoped to introduce the legislation for the Carbon Pollution Reduction Scheme into Parliament in 2009, with enactment taking place by the middle of the year.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Authors
Elisa de Wit
 
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